Part 1: The Basics – Introduction to Economic Theory

This blog series deals with the important science of Economics, and has an eye on those aspects of economic theory that are relevant to small and medium-sized businesses. It’s a huge subject, constantly changing, and with no broad agreement, even between experts, about how the economy functions, or even what aspects of it we are best advised to study! Nevertheless, some aspects are well understood and can be simplified, offering a useful insight for entrepreneurs into factors in the wider world that can have an impact at a local and individual level.

Even defining the concept of Economics is difficult. Definitions range from the global:

‘The science which traces the laws of such of the phenomena of society as arise from the combined operations of mankind for the production of wealth, in so far as those phenomena are not modified by the pursuit of any other object.’ – J. S. Mill

To the individual:

‘Economics is a study of man in the ordinary business of life. It enquires how he gets his income and how he uses it. Thus, it is on the one side, the study of wealth and on the other and more important side, a part of the study of man.’ – Alfred Marshall

The behavioural:

‘…a science which studies human behaviour as a relationship between ends and scarce means which have alternative uses.’ – Lionel Robbins

And the grandiose:

‘An inquiry into the nature and causes of the wealth of nations’ – Adam Smith

To the satirical:

‘The dismal science.’ – Thomas Carlyle

From these wide-ranging definitions, many of them made at a time when economics was still establishing itself as a serious and useful discipline, modern economics spins out a few individual threads.

Firstly, Economics is a social and political science. It can be approached from a global perspective, dealing with large numbers of people acting all at once, (this is called Macroeconomics) or from analysis of the behaviour of individual entities in response to the conditions that affect them. This is called Microeconomics. Contained within this distinction is the idea that economics relies on human behaviour and action and, although many economists steer away from outright consideration of human psychology, the discipline of Behavioural Economics is alive and well.

One of the principle uses of Economic Theory to the world of business is in the discovery and analysis of particular Indicators, [link to indicators blog] which can serve as predictors of, or inform decisions about, important events in the economy, like a rise in the interest rate, for example. A solid understanding of these is the basis of good planning and strategy for all types of enterprise.

Blog 2 in this series introduces Economic Indicators in more detail.

Pointers

  • Economics can be approached as a social and political science, from a global or individual perspective
  • Behavioural Economics studies human behaviour in an economic system
  • Economic indicators help businesses make decisions and plan strategy

Apr 16, 2015